Negotiable Instruments Act Important Sections: The Short Answer
The Negotiable Instruments Act, 1881 (in force from 1 March 1882) governs promissory notes, bills of exchange and cheques. The sections asked most in bank exams are Section 4 (promissory note), 5 (bill of exchange), 6 (cheque), 13 (negotiable instrument), 25 (public holiday), 118 (presumptions), 123–131 (crossing of cheques), 138 (dishonour of cheque, the "cheque bounce" offence), 139 (presumption for the holder), 141 (offences by companies), 142 (taking cognizance and jurisdiction), 143A (interim compensation up to 20%) and 148 (deposit of at least 20% during appeal).
Key takeaway for bank exams: Section 138 has a fixed timeline: present the cheque within its validity (3 months as per RBI), send a written notice within 30 days of the bank's return memo, the drawer gets 15 days to pay, and the complaint is filed within 1 month after that. Punishment: up to 2 years in jail, or a fine up to twice the cheque amount, or both.
The section texts below are taken from the Act as published on India Code and Indian Kanoon, checked in October 2026. The Act is administered by the Department of Financial Services, Ministry of Finance. For cheque types and crossing in detail, read types of cheques in banking.
What Is a Negotiable Instrument? (Section 13)
A negotiable instrument is a written document that promises or orders payment of money and can be transferred by delivery or by endorsement and delivery, so that the new holder gets the right to the money. Under Section 13, it means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Features exam setters like: freely transferable, a holder in due course gets a good title even if an earlier holder's title was defective, and certain presumptions (Section 118) apply in the holder's favour.
Negotiable Instruments Act Sections List (Definitions: Sections 4 to 10)
| Section | Topic | What to remember |
|---|---|---|
| 4 | Promissory note | Written, signed, unconditional promise to pay a certain sum; not a bank note or currency note; 2 parties (maker, payee) |
| 5 | Bill of exchange | Written, signed, unconditional order to pay; 3 parties (drawer, drawee, payee) |
| 6 | Cheque | A bill of exchange drawn on a specified banker and payable on demand; includes the electronic image of a truncated cheque and a cheque in electronic form (added in 2002) |
| 7 | Drawer, drawee, payee | Drawer makes the order; drawee is directed to pay; payee receives |
| 8 | Holder | Person entitled in his own name to possess the instrument and receive payment |
| 9 | Holder in due course | Gets the instrument for consideration, before maturity, in good faith, without cause to believe the title is defective |
| 10 | Payment in due course | Payment in good faith, without negligence, to the person in possession, according to the apparent tenor |
Promissory Note vs Bill of Exchange vs Cheque (Difference Table)
| Point | Promissory note | Bill of exchange | Cheque |
|---|---|---|---|
| Section | 4 | 5 | 6 |
| Nature | Promise | Order | Order on a bank |
| Parties | 2 | 3 | 3 (drawee is always a bank) |
| Payable on demand? | Can be on demand or after time | Can be on demand or after time | Always on demand |
| Days of grace | 3 days if payable after a period | 3 days if payable after a period | No days of grace |
| Acceptance needed? | No | Yes (if not on demand) | No |
| Stamp duty | Required | Required | Not required |
| Crossing | Not possible | Not possible | Possible |
Negotiation and Endorsement: Sections 14 to 16, 22 and 25
| Section | Rule |
|---|---|
| 14 | Negotiation = transfer that makes the transferee the holder |
| 15 | Endorsement = signing on the back (or on an attached slip called an allonge) for negotiation |
| 16 | Endorsement in blank (only signature) or in full (names the endorsee) |
| 22 | Maturity: 3 days of grace are added to bills and notes payable after a period |
| 25 | If the maturity date is a public holiday, the instrument is due on the preceding business day. Public holiday includes Sundays and days notified by the Central Government; this is why bank holidays are notified "under Section 25 of the NI Act" |
Paying Banker and Collecting Banker Sections (31, 85, 87, 123 to 131)
| Section | Rule |
|---|---|
| 31 | The drawee bank, having sufficient funds of the drawer, must pay the cheque; if it wrongly refuses, it must compensate the drawer |
| 85 | Protection to the paying banker: an order cheque paid in due course to an endorsee is a valid discharge; a cheque originally bearer stays bearer even if endorsed |
| 87 | A material alteration makes the instrument void against anyone who did not consent |
| 123 | General crossing: two parallel lines, with or without "& Co."; paid only through a bank account |
| 124 | Special crossing: the bank's name is written; paid only to that bank |
| 126 | Payment of crossed cheques must follow the crossing |
| 130 | "Not negotiable" crossing: the holder cannot get a better title than the transferor had |
| 131 | Protection to the collecting banker who collects a crossed cheque in good faith without negligence |
Section 138 NI Act: Dishonour of Cheque (Cheque Bounce)
Section 138 makes it an offence when a cheque issued to discharge a legally enforceable debt or liability is returned unpaid because the account has insufficient funds or the amount exceeds the arrangement with the bank.
| Ingredient / step | Rule under Section 138 |
|---|---|
| Purpose of cheque | Discharge of a legally enforceable debt or other liability (not a gift or a donation) |
| Presentation | Within 6 months of the date of the cheque or within its validity, whichever is earlier. RBI has fixed cheque validity at 3 months since 1 April 2012, so in practice it is 3 months |
| Notice | Payee or holder in due course sends a written notice within 30 days of getting the bank's information about the return |
| Time for drawer to pay | 15 days from receipt of the notice |
| Offence complete | When the drawer fails to pay within those 15 days |
| Punishment | Imprisonment up to 2 years, or fine up to twice the cheque amount, or both |
The jail term was raised from 1 year to 2 years by the 2002 amendment. Chapter XVII (Sections 138 to 142) itself was inserted in 1988.
Sections 139 to 148: Cheque Bounce Procedure for Bank Exams
| Section | Rule |
|---|---|
| 139 | Presumption that the holder received the cheque for discharge of a debt or liability (the drawer must prove otherwise) |
| 141 | Offences by companies: every person in charge of and responsible for the company's business at the time is also liable, unless the offence happened without their knowledge or despite due diligence; directors nominated because of a government post or a government financial institution are not prosecuted under this section |
| 142 | Court takes cognizance only on a written complaint by the payee or holder in due course, filed within 1 month of the cause of action (delay can be condoned for sufficient cause); not below a Metropolitan Magistrate or Judicial Magistrate First Class. After the 2015 amendment, the case is filed where the payee's bank branch is (for cheques presented through the payee's account) |
| 143 | Cases are tried summarily; in a summary trial the court can impose up to 1 year imprisonment and a fine above ₹5,000 |
| 143A | Interim compensation up to 20% of the cheque amount during trial (inserted in 2018); payable within 60 days (extendable by 30 days); refunded with interest at the RBI Bank Rate if the accused is acquitted |
| 145 | Complainant's evidence can be given on affidavit |
| 146 | The bank's return memo (slip) is presumed to prove the dishonour |
| 147 | Offences under the Act are compoundable (can be settled) |
| 148 | In an appeal against conviction, the appellate court may order a deposit of at least 20% of the fine or compensation (inserted in 2018); deposit within 60 days, extendable by 30 days |
Note: in October 2026 the Rajasthan High Court held that the Repealing and Amending Act 2025, which repealed the 2018 amending Act, does not remove Section 148, because the provision had already become part of the main Act.
NI Act Amendments Timeline
| Year | Change |
|---|---|
| 1881 | Act passed; in force from 1 March 1882 |
| 1988 | Chapter XVII (Sections 138 to 142) inserted: cheque bounce became an offence |
| 2002 | Sections 143 to 147 added (summary trial, affidavit evidence, compounding); jail term under Section 138 raised to 2 years; electronic and truncated cheques included in Section 6 |
| 2015 | Section 142 amended on territorial jurisdiction; Section 142A added |
| 2018 | Section 143A (interim compensation) and Section 148 (deposit in appeal) added |
Worked Examples: Section 138 Timeline and Amounts
Example 1 (timeline). A cheque dated 1 February 2026 is presented on 20 April 2026 (within 3 months) and returned for insufficient funds. The payee learns of the return on 22 April.
- Last date to send the written notice: 30 days from 22 April = 22 May 2026.
- The notice is sent and the drawer receives it on 26 April. The drawer can pay within 15 days, that is, by 11 May 2026.
- If no payment is made, the offence is complete and the cause of action arises on 12 May 2026. The complaint must be filed within one month of that date.
Example 2 (amounts). A cheque of ₹5,00,000 bounces.
- Maximum fine under Section 138 = 2 × 5,00,000 = ₹10,00,000.
- Maximum interim compensation under Section 143A = 20% of 5,00,000 = ₹1,00,000.
- If the trial court awards compensation of ₹6,00,000 and the drawer appeals, the minimum deposit the appellate court can order under Section 148 = 20% of 6,00,000 = ₹1,20,000.
Example 3 (validity trap). A cheque dated 10 January 2026 is presented on 15 May 2026. It is more than 3 months old, so it is stale; Section 138 cannot apply even though six months have not passed, because the law takes the earlier of six months and the validity period.
Negotiable Instruments Act Quick Revision Table
| Asked as | Answer |
|---|---|
| Year / in force | 1881 / 1 March 1882 |
| Promissory note / bill / cheque | Sections 4 / 5 / 6 |
| Negotiable instrument defined | Section 13 |
| Holder in due course | Section 9 |
| Public holiday rule | Section 25 |
| Days of grace | 3 days (Section 22); none for cheques |
| General / special crossing | Sections 123 / 124 |
| "Not negotiable" crossing | Section 130 |
| Collecting banker protection | Section 131 |
| Cheque bounce | Section 138 |
| Notice / payment window | 30 days / 15 days |
| Punishment | Up to 2 years, or fine up to 2× cheque, or both |
| Presumption for holder | Section 139 |
| Company offences | Section 141 |
| Complaint time | 1 month (Section 142) |
| Interim compensation | Up to 20% (Section 143A) |
| Deposit in appeal | At least 20% (Section 148) |
| Compoundable | Section 147 |
Negotiable Instruments Act Questions with Answers (Practice Set)
Q1. Which section of the Negotiable Instruments Act deals with dishonour of cheques for insufficient funds? (a) 131 (b) 138 (c) 141 (d) 148 Answer: (b). Section 138.
Q2. The maximum imprisonment for an offence under Section 138 is: (a) 6 months (b) 1 year (c) 2 years (d) 3 years Answer: (c). Up to 2 years (raised from 1 year in 2002), or a fine up to twice the cheque amount, or both.
Q3. After getting information of a cheque's return, within how many days must the payee send a written notice to the drawer? (a) 15 days (b) 30 days (c) 45 days (d) 90 days Answer: (b). 30 days. The drawer then has 15 days to pay.
Q4. Under Section 143A, interim compensation can be up to what share of the cheque amount? (a) 10% (b) 20% (c) 25% (d) 50% Answer: (b). 20%.
Q5. Which section defines a "cheque"? (a) Section 4 (b) Section 5 (c) Section 6 (d) Section 13 Answer: (c). Section 6; Section 4 is the promissory note and Section 5 the bill of exchange.
Q6. A promissory note has how many parties? (a) One (b) Two (c) Three (d) Four Answer: (b). Maker and payee.
Q7. Which section gives protection to a collecting banker? (a) Section 85 (b) Section 123 (c) Section 130 (d) Section 131 Answer: (d). Section 131. Section 85 protects the paying banker.
Q8. A cheque of ₹2,40,000 bounces. What is the maximum fine a court can impose under Section 138? (a) ₹2,40,000 (b) ₹3,60,000 (c) ₹4,80,000 (d) ₹7,20,000 Answer: (c). Twice the cheque amount = 2 × 2,40,000 = ₹4,80,000.
Q9. Bank holidays in India are notified under which section of the Negotiable Instruments Act? (a) Section 22 (b) Section 25 (c) Section 31 (d) Section 87 Answer: (b). Section 25 (public holidays).
Q10. Sections 143A and 148 were inserted in the NI Act in which year? (a) 1988 (b) 2002 (c) 2015 (d) 2018 Answer: (d). By the Negotiable Instruments (Amendment) Act, 2018.
Negotiable Instruments Act FAQs
What are the important sections of the Negotiable Instruments Act for bank exams?
Sections 4, 5 and 6 (promissory note, bill of exchange, cheque), 9 (holder in due course), 13 (negotiable instrument), 25 (public holiday), 31, 85, 123 to 131 (paying banker, crossing, collecting banker), and 138 to 148 (cheque bounce, presumption, company liability, complaint, interim compensation, appeal deposit).
What is Section 138 of the Negotiable Instruments Act?
It makes the bouncing of a cheque, issued to pay a legally enforceable debt, an offence if the drawer does not pay within 15 days of a written notice. The punishment is up to 2 years in jail, a fine up to twice the cheque amount, or both.
What is the punishment for cheque bounce in India in 2026?
Under Section 138, imprisonment up to 2 years, or a fine up to twice the cheque amount, or both. The court can also order interim compensation of up to 20% during trial.
What is the time limit to file a cheque bounce case?
Send a notice within 30 days of the return memo, wait 15 days for payment, and then file the complaint within one month from the date the cause of action arises. The court can accept a late complaint for sufficient cause.
Is a cheque bounce offence compoundable?
Yes. Section 147 makes offences under the Act compoundable, so the parties can settle the case.
What is Section 143A of the NI Act?
Inserted in 2018, it lets the trial court order the drawer to pay interim compensation of up to 20% of the cheque amount while the case is going on. If the drawer is acquitted, the money is returned with interest at the RBI Bank Rate.
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